Growth starts at home

A notable contingent of DFMs may be skeptical about the current prospects for UK equities, but short-term caution hasn't unduly affected the structural bias towards domestic assets. UK growth funds remain the go-to strategies for most wealth managers, and that's unlikely to change in the near future.

What has become more complicated is working out what kind of fund stands the best chance of outperforming. On a basic level, some might now see the UK as a textbook value play, but others are likely to favour a defensive approach in a time of uncertainty. And puzzles like these aren't helped by asset manager marketing strategies: even funds that talk up one investment style may, in reality, be leaning a different way.

To shine some light on which way wealth firms are leaning, we’ve taken a look at the top 10 DFM fund picks from the UK growth universe, as identified by our model portfolio tracker. 

High-profile names like Lindsell Train UK Equity and Liontrust Special Situations inevitably dominate proceedings, and although the list becomes more idiosyncratic lower down, it's clear that DFMs are retaining faith in the investment styles that have served them well over recent years. Explicit value offerings from Man GLG and Polar Capital do also have a decent following - though the performance of the former emphasises that its style is more growth-oriented than its name suggests.

Indeed, most these picks have continued to outperform of late even as markets start to struggle. Of the nine active names included, six are in the first or second quartile over the last year. Only the Franklin Templeton, Polar Capital and Lazard funds have lagged the sector. These three, alongside Investec UK Alpha, are also behind over three years.

Viewed in this context, it's not surprising that discretionaries are largely retaining their faith in active strategies on the home front. The quality growth story favoured by many of these managers remains intact for now - but 2019 could yet upend all such certainties. 

Speculate to decumulate

More than a million people have now taken flexible payments from their pensions since 2015, but the future of retirement income planning is little closer to a resolution from wealth managers’ perspective.

The FCA's still trying to get its head around the topic as well - it unveiled new proposals yesterday for the mass of consumers drawing down their pensions nowadays. 

One suggestion that's survived from its initial consultation document is the plan to offer default “investment pathways” to those who draw down without advice. From wealth managers’ perspective, what’s interesting is that advisers, too, often tend to stick with the default option. That's according to a study published at the end of last year by NextWealth.

We’ve already discussed how discretionaries are having to broaden the range of services they offer to ensure growth rates remain healthy. NextWealth’s research, like similar surveys, suggests there’s little scope for further outsourcing of adviser clients to DFMs - when it comes to those in the accumulation phase, at least.

That may not be the case for “decumulation”. More than half of advisers never outsource for clients in retirement; NextWealth thinks overall outsourcing growth will increase again as discretionaries adapt their services for such clients.

The big issue, of course, remains working out exactly how to manage the asset allocation process for this cohort. And this is one area where rockier markets may serve to help wealth managers. Because right now, many advisers use an insurer’s pension transfer service then simply leave the funds in that company’s multi-asset range.

NextWealth says the intention is “to move those assets in time”. But “advisers have been slow to shift assets. It is hard to justify doing so in the near term and some don’t bother as the assets are well enough managed”.

Those transfers remain one of the biggest drivers of pension freedom fund flows. If advisers’ faith in their default solutions is shaken, that may open the door for wealth managers - particularly if they can show they have a model portfolio range with asset allocation calibrated to retirement client needs.

Staying the course

UK equity funds may be holding firm to an extent, but the fourth quarter did take an unsurprising toll on the wider fund universe’s ability to produce consistent returns.

Latest figures from BMO’s FundWatch survey found that just 0.5 per cent of strategies were able to produce top quartile returns in each of the last 12-month periods as of December. Of a selection of 1,100 funds, that equates to just six consistent outperformers.

But it’s not just Q4 to blame. The headline rate has been falling for a while - the long term average is between two and five per cent, but had fallen to 1.7 per cent of funds by the third quarter. 

That decline sums up the problem for discretionaries. On one level, choppy markets give active managers a better chance of outperforming. On another, whipsawing price moves can make it harder for any one preference to dominate. In an effort to identify those who are able to stand out, we’ll be taking a closer look at the consistency of DFM picks in the coming weeks.